Cash Equivalents

Cash is the asset most readily available to pay debts, however at times a company may have more cash on hand than it needs to pay its debts.  Excess cash should not remain idle, especially during periods of high interest rates. Management may decide to invest the excess cash in short term  interest bearing accounts or certificates of deposits at banks and other financial institution in the government securities ( such as US Treasury notes) or in or in other securities. If these investments have a term of 90 days o less when they are purchased, they are called as cash equivalents because the funds revert to cash so quickly they are as cash on the balance sheet. Cash equivalents represent short term and cash, extremely liquid investments with the original maturities of 3 months or less during the purchase. The cash equivalent is considered as   the safe investments which carry such a low amount of risk that the result is almost ensured.

There are several different kinds of investments which might be properly recognized as cash equivalents.  The cash equivalents could be simply transferred or converted into real cash if needed and might be utilized as collateral in some of cases.  One of the best examples of the cash equivalents is the interest bearing investments. Within this group such things as money market funds and Treasury bills are quite common kinds of this type of asset.  Short-term municipal bonds, particularly those with the maturation date of three months, are usually understood to be the cash equivalents. With the operation of the business, due Accounts Receivable balances are referred to as cash equivalents. Actually, there are several numbers of services which would lend troubled companies the face value of the invoices generate at a given billing period, and utilize the payments of the invoices  in order to pay off the loan.

Questionnaire:

• What is Cash Equivalents? 
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